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Reasons for mergers and acquisitions

December 01, 2020
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Mergers

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This article is written by Christopher Manoharan who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (including PE and VC transactions) from LawSikho.

Some of the reasons for Mergers and Acquisitions 

Practical reasons for mergers and acquisitions through case study

Google’s acquisition of Motorola Mobility

In Chapter 1, we had analyzed Google’s need for acquiring Motorola Mobility.  

Acquisition of Intellectual Property: Prior to the acquisition, Google had the company had 17,000 patents, with 7,500 patents pending. After the acquisition, Google increased its patent portfolio to over 37,000 patents. This expanded portfolio helped Google defend the viability of its Android Operating System and compete with large competitors like Apple.

Sale of Assets to the Arris Group: On December 19, 2009, Google announced the sale of Motorola’s cable modem and set box business to the Arris Group through a cash and stock deal that saw Google getting richer by USD 2.35 billion.  

Sale of Assets to Lenovo: Google on January 24, 2009 announced the sale of Motorola Mobility to Lenovo in a cash and stock deal which saw the changing in hands of USD 2.91 Billion in cash and USD 750 Million in Stock. 

Sale of Motorola’s factory: This was sold to Flextronics by Google.

Acquisition of Motorola Mobility’s Cash Reserves: By virtue of the acquisition, Google got richer by USD 3.5 billion, which got taken over by Google.

Tax Benefit: Google by virtue of the acquisition also walked away with a tax benefit. As Motorola Mobility suffered a loss and Google was making a profit, the cumulative value of the loss and profit resulted in a decrease in profit which in turn assisted Google to reduce its taxes by $1 billion and a further $ 700 million due to Motorola’s Foreign operating loss.

  

Overall Acquisition Strategy:  

Google’s major reasons to acquire Motorola other than those mentioned above are as follows:

Google was threatened by Samsung’s market share and had to do something. Samsung was tweaking the Android Operating Systems beyond recognition and it was just a matter of time before the cheese would have been moved to Google’s disadvantage. Google was scouting for an opportunity to get even with Samsung and the loss making Motorola Mobility was the perfect decoy since it was one of the largest users of the Android operating system.  

Google acted to purchase Motorola, while declaring that the purchase would not affect it’s relationship with the handset makers. The 7.7. billion USD deal gave Google control over one of the largest manufacturers of mobiles, running, its own Android operating system.  The Motorola mobiles did very well in emerging markets like India and enabled Google to be in a position, strong enough to negotiate with Samsung, a decade long agreement which caused Samsung to tone down the changes in the apps it had made. 

OLA’S Acquisition of Taxi-for-Sure

The rationale for Ola’s acquisition of Taxi-for-Sure (TFS) was four fold:

  1. To obtain efficient operations at a reduced cost. 
  2.  A loyal customer base number 
  3. Better geographical reach. 
  4. Nipping the competition in the bud.

The factors that prompted the acquisition was three fold:

  1. The nimbleness of the smaller entity. The ability to provide services speedily and at a far lower cost was attractive.
  2. Ola and Taxi for sure was operating in the same segment and TFS had registered a very good growth in a short period of time, showing efficiency. It was able to provide services to the customers at a  lower cost.  Had TFS been permitted to grow it out, it would have become the third common name and industry, together with Ola and Uber.  The acquisition proved the twin benefits of securing an efficient division, as well as restricting a growth operator.
  3. TFS had a loyal customer following. The independent operations of TFS were retained.  The TFS customers did not see the acquisition as an intrusion or disturbance to the services. The geographical outreach of TFS was higher. It gave Ola outreach into many geographical markets and a different business space.

What were the issues which forced Ola to shut down TFS?

Flipkart’s acquisition of Myntra and later Jabong

Acquiring entities, operating in the same sector, could be a risky game. It could be akin to putting all your eggs in the same basket. But where the target is a market leader for niche products. consolidating the market might mean benefits for both. 

Some of the key reasons for the acquisition were:

Lead over competitors: Myntra was clearly ahead in the fashion sector and this acquisition placed Flipkart ahead of Amazon and Snapdeal.  

What lead to the success of the Flipkart – Myntra deal?

The key reasons were:

Flipkart saw entry into a new market while Myntra saw the advantages of gaining access to Flipkart’s logistic network. 

Flipkart and Myntra had common investors, Accel Partners and Tiger Global who both supported the deal, as it meant increasing the returns from for them with a lower investment.  Flipkart acquired Myntra through a 100% acquisition for an estimated 2000 crore in lieu of cash and stock. The acquisition was undertaken through a shared swap between the shareholders of Myntra and Flipkart, leaving the early shareholders of Myntra, millionaires in the process.

The founders of Flipkart saw Mukesh Bansal the founder of Myntra as a mentor and guide and treated him with respect.  He was invited to join the Flipkart board, and got involved in the Flipkart fashion business.   Flipkart and Myntra were to remain as two separate entities, but people holding stock options in Myntra will hold the same in Flipkart.  The same management team was to be retained at Myntra.  Employee roles and the company’s road map was to remain the same.

Myntra employees holding stock options were provided similar options in Flipkart, which was clearly beneficial to them, which is why the deal was supported by the employees,

The consolidation that Flipkart achieved through the back to back acquisitions of Myntra and Jabong, clearly gave Flipkart a headway. This is clearly understood from Walmart valuation of Flipkart at US 21 billion included a high valuation of Myntra and Jabong between 5.5 to 6.5 billion which had been purchased only at USD 400 million (Myntra: 330 billion and Jabong: 70 billion).

Conclusion

As the reader would notice, the reasons for mergers and acquisitions are many. In the case of Google’s acquisition of Motorola Mobility, it was a strategy to retain market relevance by getting Samsung to the table. In the case of Ola’s acquisition of Taxi for sure it was an acquisition that went awry and the only benefit was to shut out a competitor. In the case of Flipkart’s acquisition of Myntra, it lead to huge consolidation and was a win-win situation for both parties. The last was a very positive outcome.


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